Current account positive dynamics in April 2011 determined by trade balance
The current account surplus in April reached 41.3 mil. lats. The substantial month-on-month improvement was primarily fostered by the improved trade balance. The goods and services foreign trade balance was positive in April at 4.5 mil. lats. As goods imports contracted at a notably faster pace than exports, the goods trade deficit contracted by more than 40 mil. lats, but a small positive balance increase in the service sector was determined by a successful development of cargo transport services by rail.
The negative balance of the income account contracted as the amount of reinvested profits decreased slightly. EU funding flowed into Latvia in substantially lower amounts than the monthly average of the previous twelve months. In the current transfers account thus less funding flowed in for agricultural subsidies (EAGGF financing) than the monthly average in the first quarter, and practically no Cohesion Fund financing is being received. The positive balance of the capital account has thus been negligible in the first four months of the year.
The finance account balance was positive in April, and the most important positive inflows were on account of non-resident deposits attracted by the banking sector and foreign direct investment. Gradual use of the funds from the international loan, with the government doing no additional borrowing from these sources in the first four months, determined a gradual contraction of reserve assets, yet it is important to note that they still continued to cover the monetary base in record amounts (by over 200%). Moreover, reserve assets equalled imports of 6.8 months, which is substantially more than in the so-called "fat years" when this ratio fluctuated between 3.5 and 4.5 months.
The foreign trade balance continues to hover around a balanced state, with the risks of possible slower export development becoming apparent: the dynamics of Baltic Dry un Harpex indexes currently does not indicate a rapid development of international cargo transports by sea; it is also not entirely clear at the moment how the future economic developments in Belarus could affect cargo-related developments in Latvian service exports. The latest confidence indicators likewise signify deterioration in entrepreneur optimism regarding competitiveness and export possibilities in the near future. Meanwhile there are however new positive signals for attracting foreign investment, e.g., Moody's improved international credit rating outlook and the successful burrowing by the government on the international market for the first time since the first quarter of 2008.